Impact of Trade Credit on the Value of Commercial and Services Firms Listed at the Nairobi Securities Exchange
Abstract
Business entities have a financial purpose of maximizing the value of the firm
together with the shareholder’s wealth (Berle & Means, 1932). Trade credit
(receivables) supports firms to advance this objective or purpose by enhancing the
level of accounts receivables, hence affecting the revenue, profitability together with
the liquidity of the firm. In turn, this affects the market value of the firm’s equity and
assets. Nadiri (1969) stated that trade credit is costly with an opportunity cost and also
bears credit risk, because of the payment default exposure. Therefore, giving trade
credit may lead to a negative effect on the profitability and the liquidity as a result of
debt defaults. This study sought to determine the effect of trade credit on value of
commercial and services firms listed at the NSE. The independent variables were
trade credit as measured by account receivable turnover ratio, assets of the firm as
measured by total asset turnover ratio and capital structure as measured by debt to
equity ratio. Firm value was the dependent variable which the study sought to explain
and it was measured by enterprise multiplier and Tobin Q. Secondary data was
collected for a period of 5 years (2012 to 2016) on an annual basis. The study
employed a descriptive cross-sectional research design and a multiple linear
regression model was used to analyze the relationship between the variables.
Statistical package for social sciences version 21 was used for data analysis purposes.
The results of the study produced adjusted R-square value of 0.210 which means that
about 21 percent of the variation in value of commercial and services firms listed at
the NSE as measured by Tobin Q can be explained by the three selected independent
variables while 79 percent in the variation was associated with other factors not
covered in this research. The study also found that the independent variables had a
strong correlation with value of commercial and services firms listed at the NSE
(R=0.521). The results further revealed that individually, trade credit and assets of the
firm are statistically significant determinants of value of commercial and services
firms listed at the NSE while capital structure is an insignificant determinant. The
overall model was found to be not significant when firm value was measured using
enterprise multiplier. This study recommends that policy makers should establish
measures that will ensure an increase in trade credit that will improve firm value
without exposing the firm to risks associated with trade credit. These measures could
include establishing efficient trade credit policies, trade credit departments, credit
management policies and procedures and also taking trade credit insurance policies.
The researcher proposes that further studies be conducted on all commercial and
service firms in Kenya or on all listed firms in Kenya.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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